A reliable indicator says the next recession might be 3 years away: Morning Brief

Julie Hyman

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A US economic recession — for the past year always around the corner, according to pundits — hasn’t come yet. As Myles Udland wrote in yesterday’s Morning Brief, the recession clock, so to speak, has been reset.

What if that reset pushes a recession… all the way to 2026?

Let’s consider the yield curve as a recession indicator. The yield curve is the spread between yields on different maturities of government debt. The 10-year Treasury yield minus the 3-month Treasury bill yield is seen as the most accurate predictor of recession; indeed, it has preceded every recession for the past half-century.

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Here's a quick reminder of how this works.

Yields on longer-dated debt like 10-year and 30-year Treasuries are usually higher than shorter-dated maturities: If you’re lending money to your brother (or even a much safer bet like Uncle Sam), for example, over a period of a decade or more, you have less visibility into the borrower’s ability to repay. So you demand a higher rate of return.

Meanwhile, shorter-dated interest rates tend to track more closely to investors’ near-term expectations for inflation and benchmark interest rates.

When the yield curve inverts — that is, the 10-year yield falls below the 3-month yield — it implies that economic growth will weaken, and inflation will abate, over the longer term.

The yield curve has been inverted since October 25. So where’s the recession?

It could actually begin when the curve un-inverts, according to research from Jonathan Golub, Credit Suisse’s head of US Equity Strategy and Quantitative Research.

While conventional wisdom holds that a recession starts 11 months after inversion — which would mean bracing for a September slowdown — the un-inversion (or re-steepening) is a better indicator, he wrote in a note to investors.

“This makes intuitive sense as the yield curve steepens when the Fed cuts rates in anticipation of a downturn,” he wrote.

Treasury futures have moved a lot in reaction to recent commentary from Federal Reserve Chair Jay Powell indicating that a rate cut isn’t coming anytime soon.

Right now, according to Golub, those futures imply the yield curve will first un-invert in June 2026. Pricing of those futures could certainly shift again — as recently as the end of April they were pricing in un-inversion in April 2024.

But for now, they’re both a reflection and a prediction of investors’ improving view on the US economy.

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